You are interested in an investment project that costs $43,875 initially. The investment has a 5?-year horizon and promises future? end-of-year cash inflows of $11,700?, $12,285?, $11,115?, $8,775?, and $8,190?, respectively. Your current opportunity cost is 6.34% per year.? However, the Fed has stated that inflation may rise by1.5% or may fall by the same amount over the next 5 years.
Assume a direct positive impact of inflation on the prevailing rates? (Fisher effect) and answer the following? questions: (Assume that inflation has an impact on the opportunity? cost, but that cash flows are contractually fixed and are not affected by? inflation.)
a. What is the net present value? (NPV) of the investment under the current required rate of? return?
b. What is the net present value? (NPV) of the investment under a period of rising? inflation?
c. What is the net present value? (NPV) of the investment under a period of falling? inflation?
d. From your answers in (a?), (b?),and (c?),what relationship do you see emerge between changes in inflation and asset? valuation?